UNIT-III

Meaning of Canons of Taxation:

By canons of taxation we simply mean the characteristics or qualities which a
good tax system should possess. In fact, canons of taxation are related to the
administrative part of a tax. Adam Smith first devised the principles or canons
of taxation in 1776.
Even in the 21st century, Smithian canons of taxation are applied by the
modern governments while imposing and collecting taxes.
Types of Canons of Taxation:
In this sense, his canons of taxation are, indeed, ‘classic’. His four canons of
taxation are:
(i) Canon of equality or equity
(ii) Canon of certainty
(iii) Canon of economy
(iv) Canon of convenience.
Modern economists have added more in the list of canons of taxation.
These are:
(v) Canon of productivity
(vi) Canon of elasticity
(vii) Canon of simplicity
(viii) Canon of diversity.
Now we explain all these canons of taxation:
i. Canon of Equality:
Canon of equality states that the burden of taxation must be distributed
equally or equitably among the taxpayers. However, this sort of equality robs of
justice because not all taxpayers have the same ability to pay taxes. Rich people
are capable of paying more taxes than poor people. Thus, justice demands that
a person having greater ability to pay must pay large taxes.
If everyone is asked to pay taxes according to his ability, then sacrifices of all
taxpayers become equal. This is the essence of canon of equality (of sacrifice).
To establish equality in sacrifice, taxes are to be imposed in accordance with
the principle of ability to pay. In view of this, canon of equality and canon of
ability are the two sides of the same coin.
ii. Canon of Certainty:
The tax which an individual has to pay should be certain and not arbitrary.
According to A. Smith, the time of payment, the manner of payment, the
quantity to be paid, i.e., tax liability, ought all to be clear and plain to the
contributor and to everyone. Thus, canon of certainty embraces a lot of things.
It must be certain to the taxpayer as well as to the tax-levying authority.
Not only taxpayers should know when, where and how much taxes are to be
paid. In other words, the certainty of liability must be known beforehand.
Similarly, there must also be certainty of revenue that the government intends
to collect over the given time period. Any amount of uncertainty in these
respects may invite a lot of trouble.
iii. Canon of Economy:
This canon implies that the cost of collecting a tax should be as minimum as
possible. Any tax that involves high administrative cost and unusual delay in
assessment and high collection of taxes should be avoided altogether.
According to A. Smith: “Every tax ought to be contrived as both to take out and
to keep out of the pockets of the people as little as possible, over and above
what it brings into the public treasury of the State.”
iv. Canon of Convenience:
Taxes should be levied and collected in such a manner that it provides the
greatest convenience not only to the taxpayer but also to the government.
Thus, it should be painless and trouble-free as far as practicable. “Every tax”,
stresses A. Smith: “ought to be levied at time or the manner in which it is most
likely to be convenient for the contributor to pay it.” That is why, after the
harvest, agricultural income tax is collected. Salaried people are taxed at source
at the time of receiving salaries.
These canons of taxation are observed, of course, not always faithfully, by
modern governments. Hence these are basic and classic canons of taxation.
We now present other canons of taxation:
i. Canon of Productivity:
According to a well-known classical economist in the field of public finance,
Charles F. Bastable, taxes must be productive or cost-effective. This implies that
the revenue yield from any tax must be a sizable one. Further, this canon states
that only those taxes should be imposed that do not hamper productive effort
of the community. A tax is said to be a productive one only when it acts as an
incentive to production.
ii. Canon of Elasticity:
Modern economists attach great importance to the canon of elasticity. This
canon implies that a tax should be flexible or elastic in yield.
It should be levied in such a way that the rate of taxes can be changed
according to exigencies of the situation. Whenever the government needs
money, it must be able to extract as much income as possible without
generating any harmful consequences through raising tax rates. Income tax
satisfies this canon.
iii. Canon of Simplicity:
Every tax must be simple and intelligible to the people so that the taxpayer is
able to calculate it without taking the help of tax consultants. A complex as well
as a complicated tax is bound to yield undesirable side-effects. It may
encourage taxpayers to evade taxes if the tax system is found to be
complicated.
A complicated tax system is expensive in the sense that even the most honest
educated taxpayers will have to seek advice of the tax consultants. Ultimately,
such a tax system has the potentiality of breeding corruption in the society.
iv. Canon of Diversity:
Taxation must be dynamic. This means that a country’s tax structure ought to
be dynamic or diverse in nature rather than having a single or two taxes.
Diversification in a tax structure will demand involvement of the majority of the
sectors of the population.
If a single tax system is introduced, only a particular sector will be asked to pay
to the national exchequer leaving a large number of population untouched.
Obviously, incidence of such a tax system will be greatest on certain taxpayers.
A dynamic or a diversified tax structure will result in the allocation of burden of
taxes among the vast population resulting in a low degree of incidence of a tax
in the aggregate.
The above canons of taxation are considered to be essential requirements of a
good tax policy. Unfortunately, such an ideal tax system is rarely observed in
the real world. But a tax authority must go on maintaining relentlessly the
above canons of taxation so that a near- ideal tax structure can be built-up.
Characteristics of Canons of Taxation:
A good (may be a near-ideal) tax system has to fulfil the following
characteristics:
i. The distribution of tax burden should be equitable such that every person is
made to pay his ‘fair share’.
This is known as the ‘fairness’ criterion which focuses on two principles:
Horizontal equity— equals should pay equal taxes; and vertical equity—un-
equals should pay unequal taxes. That is to say, rich people should pay more
taxes.
ii. But equity must not hamper productive efficiency such that burdens should
be provided to correct inefficiencies. This ‘efficiency’ criterion says that it
should raise revenue with the least costs to the taxpayers so that tax system
can allocate resources without distortion.
iii. The two other criteria are: ‘flexibility’ and ‘transparency’.
A good tax system demands changes in tax rates whenever circumstances
change the system. Further, a good tax must be transparent in the sense that
taxpayers should know what they are paying for the services they are getting.
iv. A good tax system is expected to facilitate the use of fiscal policy to achieve
the goals of
(a) stability
(b) economic growth.
For the attainment of these goals, there must be built-in-flexibility in the tax
structure.
 Income
The word Income has a very broad meaning. It generally means a monetary
return whether received in cash or kind. The income tax department does not
make any distinction between temporary and permanent income. Every the
temporary income or one time income is taxable.
For instance, if you are salaried person, then all that is received from an
employer whether in cash, kind or as a facility is considered as income. For a
businessman, his business profits will constitute income. Income may also flow
from investments in the form of Interest, Dividend, and Commission etc. The
Income Tax Act has classified all incomes earned by persons into 5 different
heads. These are:
• 1- Income from Salary : Income can be charged under this head only if
there is an employer-employee relationship. Salary includes wages,
basic, dearness allowance, annuity, gratuity, advance of salary,
allowances, commission, perquisites in lieu of or in addition to salary and
retirement benefits. The aggregate of the above incomes, after
exemptions available, is known as Gross Salary and this is charged under
the head income from salary.
• 2- Income from House property : Any residential or commercial property
that you own will be taxed as per the Income Tax Law. If you have home
loan then interest part of it would also be considered as negative income
from House property i.e. tax benefit is there on home loan.
• 3- Income from Business or Profession : Income earned through your
profession or business is charged under the head ‘profits and gains of
business or profession.’ Normally, The income chargeable to tax is the
difference between the income received and expenses incurred.
• 4- Income from capital gains : Any profit or gain arising from transfer of
capital asset held as investments (such as house,Jewellery) are
chargeable to tax under the head capital gains. The gain can be on
account of short- and long-term gains. Our article Basics of Capital Gain
talks about in detail.
• 5- Income from other sources : Any income that does not fall under any
of the above four heads of income is taxed under the head income from
 other sources. For eg. Dividend income, interest received from bank
deposits etc.
Assesse
An income tax assesse is a person who pays tax or any sum of money under
the provisions of the Income Tax Act, 1961.
Furthermore, Section 2(7) of the act defines an income tax assesse as
anyone who is required to pay taxes on any earned income or incurred loss
in a single assessment year. They can also be referred to as each and every
person for whom:
1. Is there any action being taken under the act to evaluate his income?
2. The income of another person for which he is taxed
3. Any loss incurred by him or any other person or persons entitled to a tax
refund
Who is a ‘Person’ under the Income Tax Act?
The 7 categories of “persons” mentioned under the Income Tax Act:
• Individual
• Hindu Undivided Family
• Partnership Firm
• Company
• Association of Persons (AOP) or Body of Individuals (BOI)
• Local Authority
• Artificial Judicial Body (not covered under any of the above-mentioned
categories)
Normal Assesse
An individual who is liable to pay taxes for the income earned during a
financial year is known as a normal assessee. Every individual who has
earned any income earned or losses incurred during the previous financial
years is liable to pay taxes to the government in the current financial year.
All individuals who pay interest/penalty or who are supposed to get a
refund from the government are categorised as normal assessees. Say, Mr A
is a salaried individual who has been paying taxes on time over the past 5
years. Then, Mr A can be considered as a normal assessee under the Income
Tax Act, 1961.
Representative Assessee
There may be a case in which a person is liable to pay taxes for the income
or losses incurred by a third party. Such a person is known as
a representative assessee.
Representatives come into the picture when the person liable for taxes is a
non-resident, minor, or lunatic. Such people will not be able to file taxes by
themselves. The people representing them can either be an agent or
guardian.
Consider the case of Mr. X. He has been residing abroad for the past 7 years.
However, he receives rent for two house properties he owns in India. He
takes the help of a relative, Mr. Y, to file taxes in India. In this case, Mr. Y acts
as a representative assessee. If the assessing officer plans to investigate the
tax filing, Mr. Y will be asked to provide the necessary documents as he is
the guardian of the property and represents Mr. X.
Deemed Assessee
An individual might be assigned the responsibility of paying taxes by the
legal authorities and such individuals are called deemed assessees. Deemed
assessees can be:
• The eldest son or a legal heir of a deceased person who has expired
without writing a will.
• The executor or a legal heir of the property of a deceased person who
has passed on his property to the executor in writing.
• The guardian of a lunatic, an idiot, or a minor.
• The agent of a non-resident Indian receiving income from India.
For example, Mr P owns a commercial building from which he earns rent
income. He has prepared and signed a will stating the property should be
handed over to his niece after his death. Upon his death, his niece will be
considered as the executor of the property, i.e. deemed assessee. She will
be responsible for paying tax on the rental income thereon.
Assessee-in-default
Assessee-in-default is a person who has failed to fulfil his statutory
obligations as per the income tax act such as not paying taxes to the
government or not filing his income tax return. For example, an employer is
supposed to deduct taxes from the salary of his employees before
disbursing the salary. He is, then, required to pay the deducted taxes to the
government by the specified due date. If the employer fails to deposit the
tax deducted, he will be considered as an assessee-in-default.
Roles/Responsibilities and Duties of an Assessee
Assesses must file their returns on time and pay their taxes when they are
due. However, an assessee may frequently fail to file their return on time. In
this situation, they may receive a notice from the IT department or the
relevant Assessing Officer requesting information about why the return was
not filed for that particular fiscal year. In this scenario, the assessee must
provide a response to the Assessing Officer explaining why they did not file
his returns on time, and he must also file the returns as soon as he receives
the notification.
Let us take a quick look at the various roles and responsibilities of an
Assessee upon receiving a notice:
• As soon as the Assessee receives the notice from the department, they
must file their tax returns for the avoided income for the specific
assessment year.
• After filing the returns, they may obtain a copy from the assessing officer
that clearly states the grounds for which the officer issued the notice to
them.
• If the Assessee believes that the grounds given in the copy are not valid,
and they are not satisfied with the reasons, they may file an objection
and question the legality of the notice.
• The Assessee must also ensure that they have valid reasons for filing the
objection and that they have properly decided to query the
government's notification.
• If the officer rejects the Assessee's allegations, the Assessee may submit
a request to the concerned Assessing Officer, asking him to provide
additional explanations.
 • The Assessee may choose to contest the legitimacy of the notification
much before the planned assessment or re-assessment is completed by
filing a writ petition with the relevant High Court.
• The Assessee may also choose to challenge the legitimacy of the notice
even after the planned assessment is completed by filing a writ petition
with the respective High Court.
• The Assessee must provide details relevant to their income returns
within 30 days of the date of issuance of the notice, not the date on
which the notification was received by the Assessee. To avoid
complications later on, the details relevant to the income for which tax
payment has been avoided, as well as other associated income details,
must be clearly given and filed with the concerned authorities.

Financial Year and Assessment Year

What is a Financial Year?
The financial year is the calendar year in which you received your money. It
begins on April 1st of each calendar year and ends on March 31st of the next
calendar year. The word "financial year" is sometimes abbreviated as "F.Y." An
assessee must measure and plan taxes for the fiscal year, but the income
tax return must be filed the next year or Assessment Year.
For instance,
• The income earned in the present Financial Year (FY) 2022-23 is the
income earned from April 1, 2022, to March 31, 2023.

• Any money earned by you from April 1, 2022, to March 31, 2023, is
simply referred to as income earned in Financial Year (FY) 2022-23.
What is an Assessment Year?
The assessment year is the period (from April 1 to March 31) during which you
are taxed on the money you receive in a given financial year. In the relevant
assessment year, you must file your income tax return. The year immediately
after the Financial Year is known as the Assessment Year.
For instance, if you're looking for a unique way to express yourself.
• In Assessment Year 2023-24, income gained in the current Financial Year
2022-23 (i.e. from April 1, 2022, to March 31, 2023) will be taxable (i.e.
from 1st April 2023 to 31st March 2024).

• In Assessment Year 2023-24, income received in Financial Year 2022-23

(i.e. from April 1, 2022, to March 31, 2023) will be taxable (i.e. from 1st
April 2023 to 31st March 2024).
The Indian Financial Year
In India, the fiscal year starts on April 1 and ends on March 31. AY 2023-24 will
be the review year for FY 2022-23. In certain circumstances, the financial year
may vary from the previous year.
Assessment and Financial Year in India for the Recent Years

Period Financial Year Previous Year Assessment Year

1 April 2018 to 31st March 2019 2018-19 2018-19 2019-20

1 April 2019 to 31st March 2020 2019-20 2019-20 2020-21

1 April 2020 to 31st March 2021 2020-21 2020-21 2021-22

1 April 2021 to 31st March 2022 2021-22 2021-22 2022-23

1 April 2022 to 31st March 2023 2022-23 2022-23 2023-24

Difference Between AY and FY

A person's financial year is the year in which he or she receives money
for tax purposes. The assessment year is the year after the financial year in
which the prior year's revenue is assessed, tax is collected, and the ITR is filed.
For example, the financial year beginning on April 1, 2022, and ending on
March 31, 2023, is known as Financial Year 2022-23. The assessment year
starts after the financial year ends, so AY 2023-24 will be the assessment year
for F.Y. 2022-23.
ITR Due Dates for FY 2022-23 (AY 2023-24)
The below-mentioned table lists down the ITR last dates 2023-

Category Income Tax Return Last Date

ITR Filing for Individual/HUF/AOP/BOI 31st July 2023

Businesses (that require audit) 31st October 2023

Businesses (that require requiring transfer pricing reports) 30th November 2023

Revised Return 31 December 2023

Belated/Late Return 31 December 2023

ITR forms
There are seven different types of ITR forms available to Indian taxpayers.
These forms cater to individual taxpayers and organisations. The type of ITR
form you must use will depend on whether you are an individual taxpayer or an
organisation, your total income, as well as the sources of your income. Here is a
list of 7 types of ITR forms:
1. ITR-1
Individuals who fall under the following categories, should opt for ITR-1 form
• Salary and pension earners
• Income earned from other sources (except winning a lottery or horse
racing)
• Agricultural income less than Rs.5,000
 • Payments received for a single house property with certain exclusions
2. ITR-2
Individuals and Hindu United Families (HUF) who fall under the following
categories, should opt for ITR-2 form.
• Income exceeding Rs.50 Lakh
• Income received through salary, pensions, capital gains and other
sources
• Income generated from foreign assets
• Agricultural income exceeding Rs.5,000
3. ITR-3
Individuals and Hindu United Families who fall under the following categories,
should opt for ITR-3 form.
• Income from a business or profession
• Income received from being a partner in a firm
• Income received through salary, pension, capital gains and other sources
• Investments in unlisted equity shares
• Individual director in a company
4. ITR-4 or Sugam
Individuals, Hindu United Families, and firms with an income up to Rs.50 lakh
from businesses or a profession can opt for ITR 4 form. Moreover, those who
have chosen the presumptive income scheme under Section 44AD, Section
44ADA and Section 44AE of the Income Tax Act are eligible to file their returns
using the ITR 4 form.
5. ITR-5
The ITR-5 form is meant for firms, Body of Individuals, co-operative societies,
Limited Liability Partnerships, Association of Persons, local authorities, Artificial
Judicial Persons, estate of insolvent, estate of deceased, and business trusts
(not individual citizens).
6. ITR-6
The ITR-6 form is to be filed electronically by companies, except for those that
claim an exemption under Section 11, which is income from a religious or
charitable property.
7. ITR-7
Companies filing their return under below sections of the Income Tax Act can
use ITR-7:
Section 139(4A): Individuals holding a property for charitable or religious
purposes.
Section 139(4B): Political parties and affiliates.
Section 139(4C): Institutions or associations such as medical institutions, news
agencies and establishments, educational institutions, think tanks, and
agencies involved in scientific research.
Section 139(4D): Colleges and universities, or other institution where revenue
and losses are not required to be reported as per the rules laid under this
section of the Act.
Residential Status Under Income Tax Act
It is critical for the Income Tax Department to establish a taxable individual’s or
company’s residence status. It is especially important during the tax filing
season. In reality, this is one of the variables used to determine a person’s
taxability.
Residential Status for Income Tax
An individual’s taxability in India is determined by his residential status under
the income tax act in India for any given fiscal year. The phrase “residential
status” was coined by India’s income tax rules and should not be confused with
an individual’s citizenship in India.
An individual may be an Indian citizen but become a non-resident for a certain
year. Similarly, a foreign citizen may become a resident of India for income
tax purposes in a given year.
It is also worth noting that the residential status as per income tax differs to
sorts of people, such as an individual, a corporation, a company, and so on,
decided differently.
Resident Status Classifications
Income Tax Law has divided the residence status of an individual in India into
three categories based on the length of time he or she has lived in India. An
individual’s residential status will include his or her current fiscal year as well as
previous years of stay.
The following categories are used to classify an individual’s residence status.
o Resident (ROR)
o Resident but Not Ordinarily Resident (RNOR)
o Non-Resident (NR)
• Resident and Ordinarily Resident
Individuals are deemed to be residents of India under Section 6(1) of
the Income Tax Act if they meet the following conditions: If he/she stays in
India for 182 days or more in a fiscal year, or if he/she stays in India for 60 days
or more in a fiscal year, and if he/she stays in India for 365 days or more in the
four years immediately before the previous year and comes under ordinary
resident in income tax.
According to section 6(6) of the Income Tax Act of 1961, there are two criteria
under which an individual will be considered a “Resident and Ordinarily
Resident” (ROR) in India.
o If he or she spends 730 days or more in India in the seven years
preceding the current year.
o If he/she has resided in India for at least two of the ten prior fiscal years
before the current year.
• Resident but Not Ordinarily Resident
When an assessee meets the following fundamental requirements, he or she
will be regarded as RNOR: If an individual stays in India for a time of 182 days
or more in a fiscal year; or if he/she stays in India for a period of 60 days in a
fiscal year and 365 days or more in the four preceding fiscal years.
An Assessee, on the other hand, will be classified as a Resident but Not
Ordinarily Resident (RNOR) if they meet one of the following fundamental
conditions:
o If he/she stays in India for 730 days or more in the previous fiscal year.
 o If he/she was a resident of India for at least 2 out of 10 days in the
previous fiscal year.

• Non Resident
An individual will be eligible for Non-Resident (NR) status if he or she meets the
following criteria:
o If an individual spends less than 181 days in India within a fiscal year.
o If an individual stays in India for no more than 60 days in a fiscal year.
o If an individual stays in India for more than 60 days in a fiscal year but
does not remain for 365 days or more in the preceding four fiscal years.
Tax for Residents, NR, NROR
For a Resident

A resident will be taxed in India on his total income, which includes money
generated in India as well as income obtained outside of India.

For NR and RNOR

Their tax burden in India is limited to the income they make in the country.
They are not required to pay any tax in India on their international earnings.
Also, in the event of double taxation of income, when the same income is taxed
in India and overseas, one may rely on the Double Taxation Avoidance
Agreement (DTAA) that India would have signed with the other nation to avoid
paying taxes twice.

Incidence Of Tax—Scope Of Total Income (Section 5)

Total income of an assessee cannot be computed unless we know his
residential status in India during the previous year. According to the residential
status, the assessee can either be:
i. Resident in India; or
 ii. Non-resident in India.
However, individual and HUF cannot be simply called resident in India. If
individual is a resident in India he will be either:
a. Resident and Ordinarily resident in India; or
b. Resident but not Ordinarily resident in India.
Other categories of persons shall either be resident in India or non-resident in
India. There is no further classification into ordinarily resident or not ordinarily
resident in their case.
Scope of Total Income according to residential status is as under:
(A). In the case of Resident in India (resident and ordinarily resident in case of
individual or HUF) [Section 5(1)]:
The following incomes from whatever source derived form part of Total Income
in case of resident in India/ordinarily resident in India:
(a) any income which is (b) any income which (c) any income which
received or is deemed to be accrues or arises or is accrues or arises
received in India in the deemed to accrue or arise outside India during
relevant previous year by or in India during the the relevant previous
on behalf of such person; relevant previous year; year.

(B) In the case of a Resident but not Ordinarily Resident in India (In the case of
individuals and HUF only) [Section 5(1) and its proviso]:
The following incomes from whatever source derived form part of Total Income
in the case of resident but not ordinarily resident in India:

(a) any income which is (b) any income which (c) any income which accrues or
received or is deemed accrues or arises or is arises to him outside India
to be received in India deemed to accrue or during the relevant previous
in the relevant previous arise to him during year if it is derived from a
year by or on behalf of the relevant previous business controlled in or a
such person; year; profession set up in India.
(C) In the case of Non-Resident [Section 5(2)]:
The following incomes from whatever source derived form part of Total Income
in the case of Non-Residents in India:

(a) any income which is received or is (b) any income which accrues or
deemed to be received in India during arises or is deemed to accrue or arise
the relevant previous year by or on to him in India during the relevant
behalf of such person; previous year.

Thus it may be noted that income described in items (a) and (b) in all the three
cases above are to be included in total income of all the three categories of the
assessees in the same manner. The income described in item (c) i.e. income
which accrue or arise outside India is:
i. not includible in the total income at all in case the assessee is non-
resident in India.
ii. includible in the total income in the case of resident but not ordinarily
resident in India only when it is derived from a business controlled in or
profession set up in India
Therefore, the incidence of tax is likely to be more in case of an assessee who
is resident and ordinarily resident in India, a little less in case of a resident but
not ordinarily resident in India and the least in case of non-resident in India if
the assessee has various incomes both inside and outside India.

The provisions regarding incidence of tax above may be summarised in the

following table:
Particulars of Income Whether Taxable

Resident
Not-
and Non-
Ordinarily
Ordinarily Resident
Resident
Resident

1. Income received or deemed to be received

in India whether earned in India or Yes Yes Yes
elsewhere.

2. Income which accrues or arises or is Yes Yes Yes

deemed to accrue or arise in India during the
previous year, whether received in India or
elsewhere.

3. Income which accrues or arises outside

India and received outside India from a Yes Yes No
business controlled from India.

4. Income which accrues or arises outside

India and received outside India in the Yes No No
previous year from any other source.

5. Income which accrues or arises outside

India and received outside India during the
No No No
years preceding the previous year and
remitted to India during the previous year.

How to Calculate the Residential Status of an Individual?

First, it is noted if the individual falls under the category of exceptions for
primary conditions.

After which, it is noted if they satisfy the basic condition of 182 days or more. If
they do come under the classification, they would be treated as a resident or a
non-resident.
Incomes Exempted from Tax
Section 10 of the Income Tax Act, of 1961 states that salaried employees have
the right to enjoy tax exemption in certain cases. The intention of the provision
is to alleviate the burden of various taxes such as rent and travel allowances,
gratuity, etc.
The following are the incomes that are subjected to an exemption under this
respective section of the Income Tax Act, of 1961.
1. Agricultural Income
Those individuals that derive their income from agriculture are entitled to a tax
exemption. This includes the income from farmhouses as well. To know if an
income would fall under the category of agricultural income, it is necessary to
look into the definition put forward by Section 2(1A) of the Income Tax Act,
1961. Agricultural income is:
• Any revenue or rent derived from land which is situated in India and is
used for agricultural purposes
• Income derived from agricultural operations including processing of
agricultural produce to sell in the market
• Any income from the farmhouse subject to satisfaction of certain
conditions mentioned in section 80 DDB
• Income from nursery saplings or seedlings.
If your business operated by a single individual then you should file ITR for
Proprietorship
2. The Income of Hindu Undivided Family (HUF)
Revenue received from family income or income from the impartible family
estate or property by any member of the Hindu undivided family (HUF) is
exempted from income tax return.
For instance, if ₹ 500,000 is the total income earned by a member of a HUF, the
total amount is exempted from tax. Suppose, if ‘A’ is also a member of the HUF
and has earned ₹ 20,000 individually, and has also received ₹30,000 from the
HUF, then A is liable to pay taxes only for the amount that was earned in an
individual capacity and not the amount that was received from the HUF
income.
LLP ITR filing is mandatory as per the Income Tax Act, 1961, and failing to do so
can result in penalties and legal consequences. Click here know
about LLP income tax rates
3. Tax Exemption on Profit Share from firm/LLP
The profit share received by a partner from a firm is exempt from tax in the
hands of the partner. Similarly, the profit share of a partner of LLP from
the LLP will be exempt from tax in the hands of the partner. However, such
exemption is limited only to the profit share and is not extended to interest on
capital and remuneration received by the partner from the 80TTB
4. Income Earned by Non-Resident Indians (NRIs) by Way of Interest on
Certain Bonds and Securities
Income earned by NRIs by way of interest on security bonds or through bank
accounts in India can avail the tax exemption. In case of an individual’s income
by way of interest on moneys standing to the credit in a Non-Resident
(External) Account in any bank in India following FEMA, 1999 is exempt from
income tax. However, the exemption is applicable only if a person is a resident
outside India as defined under FEMA, 1999, or a person who has been
permitted by the RBI to maintain the account mentioned above. This section
bestows tax exemption on Indian citizens and persons of Indian origin, who are
non-residents and earn income from interest on notified savings certificate.
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Further, any income on interest received by a non-resident or a foreign
company in respect of Rupee Denomination Bonds issued outside India from
17 September 2018 to 31 March 2019 by an Indian company/ business is
exempt from tax. Also, Capital gains arising out of the transfer of capital assets,
rupee denomination bonds, or Derivatives by Category-III are also exempted
from tax.
5. Leave Travel Concession
Section 10 (5) of the Act states that an employee, whether an Indian or foreign
citizen, is eligible to avail of a tax exemption on leave travel to any place within
India from the employer.
6. Remuneration Received by Diplomats and their Staff
This is a special provision for Indian representatives such as high
commissioners, trade commissioners, consulate representatives, etc working in
other countries wherein they can avail of a tax exemption. Employees of
foreign countries can also enjoy the benefits of this provision provided Indian
employees enjoy a similar exemption in their countries.
7. Technical fees Received as Income by Foreign Companies
With respect to projects pertaining to the security of India, agreements are
entered by the Government of India with foreign countries. Here, the income is
mostly received by way of royalties or fees for the exchange of technical
services as per the agreement between the countries, and the same is
exempted from taxes.
8. Allowances Paid by the Indian Government
The Indian government pays its employees various allowances and perquisites
for rendering services outside India. Such remuneration is exempt from taxes.
The Indian citizens who work for the government of India can avail of this
exemption.
9. Voluntary Retirement Scheme
The amount received by an individual after having opted for voluntary
retirement is exempt from taxes, provided the individual is an employee of a
public sector or any other company, an authority under a central, state, or
provincial Act, or local authority.
10. Life Insurance Policies
When an individual receives the amount after the maturation of a life
insurance policy, the amount is exempted from taxes.
11. Exemption to Gratuity
Gratuity received by the central and state government servants, and local
authorities are exempted from tax as per Section 10(10)(i) of the Act. The
exemption is also available to non-governmental employees, if the Payment of
Gratuity Act, 1972 is applicable to them. The gratuity is exempt from taxes
within a maximum ceiling of 10 lakh rupees.
12. Pension Received by Employees
The monthly pension received by government employees is completely exempt
from tax.
13. Leave Salary
The encashment of leave by government employees at the time of their
retirement is exempt from tax.
14. Retrenchment Compensation
The compensation received by an employee at the time of retrenchment is
exempt from tax to a certain limit.
15. Amount received from Provident Fund
Under Section 10(11) of the Act, any amount of money received from a public
or statutory provident fund or unrecognized provident fund earns a tax
exemption. Also, payment made towards the scheme Sukanya Samriddhi Yojan
is also exempt from tax as stipulated under this section.
16. Awards and Scholarships
Monetary assistance received in form 26 AS of awards or scholarships is
exempted from income tax returns online under Section 10 (16). There is no
cap on the upper limit and the total money received as a scholarship is entitled
to tax exemption.
17. House Rent Allowance (HRA)
One of the most common allowances given by the employer to the employees
is the House Rent Allowance, to cover the rental expenses. The portion of the
salary that is allocated as HRA is exempt from taxes.
18. Allowances under Section 10 (14)
Special allowances such as daily allowance, uniform allowance, helper
allowance, etc are provided to employees during the course of their
employment. Section 10(14)(i) covers these provisions and the allowances
under the respective section are exempted from taxes. Section 10(14)(ii) enlists
allowances that are offered to the employees that enable them to meet their
day-to-day expenses. The allowances are subjected to taxes when they exceed
the stipulated limit. Allowances such as children’s education allowance, tribal
area allowance, border area allowance, special compensatory allowance, etc
are covered under this section.